Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement before the Financial Stability Oversight Council. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.
Thank you, Secretary Yellen, for focusing the Council’s attention on financial resiliency with regard to three key parts of our capital markets — particularly money market funds, open-end bond funds, and hedge funds.
The fund industry gives retail and institutional investors the opportunity to pool their assets, get investment advice, and attain diversification and efficiency. These pools of assets have become a significant part of our markets. There’s $5 trillion in money market funds, nearly $7 trillion in open-end bond funds, and $9 trillion in gross assets under management in hedge funds.
The nature, scale, and interconnectedness of these fund sectors, though, also pose issues for financial stability. This is not just based on financial economic theory, but also upon the practical lessons of the past. We’ve seen such risks emanate from these sectors during the 2008 financial crisis, at the start of the COVID crisis in March 2020, and in 1998, when the hedge fund Long-Term Capital Management failed. [1]
Money market funds and open-end bond funds, by their design, have a potential liquidity mismatch — between investors’ ability to redeem daily on the one hand, and funds’ securities that may have lower liquidity. While this might not be as significant a concern in normal markets, we’ve seen that in stress times, these funds’ liquidity mismatches can raise systemic issues. Hedge funds can present financial resiliency risks through leverage or derivatives positions.
